So Cal Tobacco deal gives investors the yield they crave

Bonds

Tuesday saw bond sales come and go, the day before interest rates are presumably going lower.

The day started off little changed, with focus on new issues, according to a New York trader. “The secondary market is quiet,” he said, pointing to the aggressive pricing of new issues. “That reflects the strong demand for high-yield debt.”

But by Tuesday afternoon, the weakness in the municipal market caught up to Monday’s Treasury selloff, according to Dan Urbanowicz, director of fixed income at Ziegler Capital Markets.

“While inflows continued last week, the market appears to be taking a cautious approach before the Fed is expected to cut rates tomorrow, but may deliver a more hawkish statement,” he said.

“The larger tax-exempt new issues pricing today were well received, but seemed to be priced more on the aggressive side as compared to recent weeks,” Urbanowicz said.

He noted that the taxable muni side has dominated the new-issue calendar, leading to spreads widening to attractive levels versus similarly rated corporates.

Jefferies priced the Tobacco Securitization Authority of Southern California’s $405.964 million of tobacco settlement asset-backed refunding bonds. The deal consists of three series and carries ratings from S&P Global Ratings as follows: In the 2019A series, the 2020 through 2029 maturities carry an A rating, the 2030 through 2039 maturities are rated A-minus, and the 2048 maturity is rated BBB plus; in the series 2019B-1, the 2029 maturity is rated BBB plus and the 2048 maturity is rated BBB minus, Series 2019B-2 is not rated.

The deal was very well received, as it ended up being bumped based on the strong order flow. The deal had a lot going for it, in part, in the post-tax reform world with appetite for high-yield and limited product to satisfy from a high-tax state like California. The transaction benefited against a backdrop of roughly $72 billion of inflows into bond funds and $18 billion into high-yield funds year to date.

“The deal had a robust, creative and carefully crafted structure,” said a source familiar with the deal. It attracted the who’s who of investors, including broad participation from separately managed accounts, money managers and insurance companies.

“The deal also saw a fair bit of replacement demand as well,” according to the source. “Those investors needed to put that money back to work somewhere and they saw this deal as an good opportunity to do so.”

One portfolio manager said that the deal appeared to be going well enough.

“It’s oversubscribed — no surprise there and saw price bumps of six to 12 basis points,” he said.

Another money manager who did not participate in the deal, said that it was “put away pretty good” but from what he saw, the front-end was not very cheap, while the long end was.

“Just my two cents, but from a buy-and-hold perspective I would be nervous to hold onto those longer-dated maturities,” he said. “Tobacco sales are and have been trending down and I don’t see that changing anytime.”

Although he did add that this deal featured a 10-year call option — something that has been not included in a good amount of deals this year, so that was another reason why it attracted the number of buyers it did.

A different portfolio manager added that the went “very well.”

“The yieldiest bonds — the zeros and the long paydown bonds were very oversubscribed,” he said. “Assumptions for decline rates were pretty conservative, which probably allowed a wide array of funds to get involved.”

Bank of America priced Lehigh County General Purpose Authority’s (A2/A+/NR) $417.47 million of hospital revenue bonds for Lehigh Valley Health Network.

Loop Capital priced the State Public Works Board of California’s (Aa3/A+/AA-) $312.615 million of lease revenue various capital project bonds.

Citi priced and repriced California Municipal Finance Authority’s ( /BB/ ) $294.905 million of special facility revenue bonds for the United Airlines Project.

Since 2009, the California MFA has issued roughly $8.82 billion of securities, with the majority of that taking place in the last three years. The authority saw a yearly high of issuance last year with $2.39 billion and the lowest issuance in 2012 when it sold $140 million.

Citi also priced State of Ohio’s (Aa2/AA/NR) $241.35 million of taxable hospital refunding revenue bonds for the Cleveland Clinic Health System Obligated Group.

Morgan Stanley priced Cumberland County Municipal Authority, Pennsylvania’s (A1/A+/ ) $221.83 million of revenue bonds for Penn State Health. Morgan Stanley is also running the books on Penn State Health’s (A1/A+/ ) $200 million of taxable corporate CUSIP bonds.

Wednesday will be quiet in the primary, as the Federal Open Market Committee will make a decision on interest rates, which is expected to be another quarter point cut.

Tuesday’s bond sales
Lehigh County General Purpose Authority pricing

California Municipal Finance Authority pricing

State Public Works Board State of California pricing

State of Ohio pricing

Cumberland County Municipal Authority pricing

Secondary market
Munis were mixed on the MBIS benchmark scale, with yields falling by less than a basis point in the 10-year and rising by one basis point in the 30-year maturity. The MBIS AAA scale was stronger, with yields decreasing by less than a basis point in the 10-year maturity and by six basis points in the 30-year maturity.

On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on both the 10- and 30-year maturities were one basis point higher to 1.55% and to 2.14%, respectively.

The 10-year muni-to-Treasury ratio was calculated at 84.5% while the 30-year muni-to-Treasury ratio stood at 91.8%, according to MMD.

Treasuries yields were trading lower and stocks were in the red. The Treasury three-month was down and yielding 1.629%, the two-year was down and yielding 1.647%, the five-year was down and yielding 1.659%, the 10-year was down and yielding 1.839% and the 30-year was down and yielding 2.335%.

Previous session’s activity
The MSRB reported 27,653 trades Monday on volume of $6.18 billion. The 30-day average trade summary showed on a par amount basis of $10.69 million that customers bought $5.89 million, customers sold $2.91 million and interdealer trades totaled $1.89 million.

California, New York and Texas were most traded, with the Golden State taking 13.34% of the market, the Empire State taking 12.561% and the Lone Star State taking 11.195%.

The most actively traded security was the Miami Dade County, Fla., water and sewer revenue taxable 3.49s of 2042, which traded 18 times on volume of $45.3 million.

Treasury to sell $55B 4-week bills
The Treasury Department said it will sell $55 billion of four-week discount bills Thursday. There are currently $40.048 billion of four-week bills outstanding.

Treasury also said it will sell $40 billion of eight-week bills Thursday.

Gary E. Siegel contributed to this report.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation.

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